Sunday, November 24, 2013

Case Against Estate Tax



For years people have talked about trying to repeal the estate (death tax). By the time someone dies the money that is subject to estate taxed has been taxed multiple times. The money is first taxed when it is earned (federal, state, and sometimes even city tax). If that money is invested and if someone sells their investment they are taxed again (at a rate of either capital gains or ordinary income). Once they sell the investment if that same money is used to purchase something you have to pay sales tax. Then when the person dies they are taxed after already being taxed multiple times.  The estate tax started in 1916 and the exemption was $50,000 which would be around $1 million adjusted for inflation today. The exemption these days is over $5 million per person. Let's not forget if you give over $14,000 a year to someone you are not only required to let the government know (Form 709) but you also may have to pay tax on that. However, the estate tax by itself raised very little revenue. In fact the estate tax raises less than ½ of 1% of all revenue. The United States also has the third highest marginal estate tax rate in the world. People with lots of money can easily find ways to get around the estate tax by either giving it away, setting up certain types of trusts, or spending it. What is really interesting is people like Warren Buffett and Bill Gates who are both in favor of higher taxes are giving all their money away to charity (I guess they really trust how the government would spend their money).

You hear statistics like the estate tax only affects 2 in 1,000 estates. The problem can mislead someone into thinking only 2 in 1,000 estates have over $5 million. The major problem with this is that many people with over $5 million are figuring out ways to not have to pay estate taxes. People can set up various types of trusts, give the money to charity during their lifetime, or spend it which would not subject them to the estate tax. The rich didn't rich by being stupid as Dr. Walter E. Williams would say.

Basically if have any right or control over property it will end up in your estate. The estate tax makes zero economic sense because it inducing not to invest and accumulate wealth since it will be taxed. This is why so many wealthy people give assets and money to either family members, charity, or their children. Let's not forget the wealthy people who do set hire accountants, financial planners, and lawyers have an implicit tax of hiring t However,  if you give over a certain amount to family members then you have to pay gift taxes and if you give money away to someone too young you might have generation skipping taxes (see how the taxes start adding up quickly).

Other popular arguments you hear are that the estate tax is used to break up the concentration of power. This too is nonsense considering usually the kids of the people who worked hard to earn the money generally don’t have the same work ethic or values as the people who actually earned the money. Most often times the wealth lasts for three generations. In actuality not having an estate tax or gift tax would actually break up the concentration of wealth because if people could free give their money to whoever they wanted, money would move to many more and different people.